Seamlessness or Segmentation? International Economic Governance and European Sovereign Debt

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This panel was convened at 1:00 p.m., Thursday, March 24, by its moderator, Thomas W. Laryea of the Office of the General Counsel at the International Monetary Fund, who introduced the panelists: Jay Collins of Citibank-London; Eli Whitney Debevoise of Arnold & Porter LLP; Odette Lienau of Cornell University Law School; and Ann Misback of the Federal Reserve Board. **

INTRODUCTORY REMARKS BY THOMAS W. LARYEA

I commend the organizers for appropriately reinstating the discussion of sovereign debt restructuring in ASIL annual meetings. It was only a few years ago when many commentators were wondering whether the subject of sovereign debt restructuring had been relegated to history books as a problem that had been solved. Perhaps today it is clearer that sovereign debt restructuring concerns may only have been overshadowed by other problems for a period, and now may be looming as large as ever.

The absorption of private debt problems in the financial, corporate, and household sectors into sovereign balance sheets in advanced economies has been a marked feature of the continuing aftermath of the global financial crisis. For a number of countries, the deterioration in sovereign debt has been exacerbated by the substantial fiscal stimulus needed to stabilize the economy and by the relative contraction in gross domestic product. The result from the combination of these factors suggests that, in some countries, public finances cannot be sustained without substantial adjustment, and the concern of debt restructuring further compounding vulnerabilities in financial markets remains.

In contrast to previous sovereign debt crisis where the focus had been on emerging markets in Latin America and Asia, or on debt relief to low-income countries, the spotlight is now on highly indebted advanced economies. In varying degrees, the public debt burdens of countries such as Greece, Ireland, Italy, Portugal, Spain, the United Kingdom, the United States, and Japan weigh heavily on the markets and agenda of international policy makers. The tables have been dramatically turned.

A critical question is whether our learning from past sovereign debt crises has provided us with sufficient tools to address the current evolving problems. If history teaches us anything, it is that some innovation will be required to tackle the particular institutional, macroeconomic, and financial market contexts relevant today.

Notably, past legal developments in the area of sovereign debt have been dynamic, with the pendulum swinging between public international law and private law techniques. The public international law techniques have advanced from the law of war or gunboat diplomacy as methods for the enforcement of sovereign debt, to proposals to create sovereign bankruptcy regimes by treaty and the use of dispute resolution provisions under investment treaties. The private law solutions have included stripping sovereigns of immunity for debt defaults and including contractual provisions such as collective action clauses in sovereign bond contracts.

The mix of techniques that would be adopted in the Euro debt crisis--if debt restructuring proves inevitable--remains to be seen.

To my mind, the Euro debt crisis presents four notable aspects that provide a distinct color to the legal and policy dialogue:

* First, the Euro debt problem is erupting on the heels of the global financial crisis--before the lessons from that crisis have been fully embedded into necessary reforms.

The Euro debt problem re-exposes weaknesses recognized in the financial crisis, such as the uncertain role of central banks in the provision of liquidity, and in financial crisis more generally; the inadequacy of bank resolution tools; controversies over the role of credit rating agencies; the indeterminate effect of credit default swaps on the incentives for debt accumulation and restructuring; and the unwholesome relationship between governments and their banks with respect to the holding of government debt. …